OCEANFIRST FINANCIAL CORP [OCFCP] Filings

10-Q 1 ocfc-20230930.htm 10-Q ocfc-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

________________________________________________

FORM 10-Q

________________________________________________


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-11713

________________________________________________

OceanFirst Financial Corp.

(Exact name of registrant as specified in its charter)

________________________________________________


Delaware			22-3412577
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)


110 West Front Street,	Red Bank,	NJ	07701
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: (732) 240-4500

________________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, $0.01 par value per share

OCFC

NASDAQ

Depositary Shares (each representing a 1/40th interest in a share of 7.0% Series A Non-Cumulative, perpetual preferred stock)

OCFCP

NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒.

As of November 3, 2023, there were 59,423,069 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

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OceanFirst Financial Corp.

INDEX TO FORM 10-Q


		PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (unaudited)
	Consolidated Statements of Financial Condition as of September 30, 2023 (unaudited) and December 31, 2022	22
	Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2023 and 2022	23
	Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2023 and 2022	24
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and nine months ended September 30, 2023 and 2022	25
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended Sep tember 30, 2023 and 2022	27
	Notes to Unaudited Consolidated Financial Statements	29
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	20
PART II.	Other Information	52
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults Upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	53
Signatures		54

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


FINANCIAL SUMMARY(1)	At or for the Quarters Ended
(dollars in thousands, except per share amounts)	September 30, 2023			June 30, 2023			September 30, 2022
SELECTED FINANCIAL CONDITION DATA:
Total assets	$	13,498,183		$	13,538,903		$	12,683,453
Loans receivable, net of allowance for loan credit losses	10,068,156			10,030,106			9,672,488
Deposits	10,533,929			10,158,337			9,959,469
Total stockholders’ equity	1,637,604			1,626,283			1,540,216
SELECTED OPERATING DATA:
Net interest income	90,996			92,109			95,965
Provision for credit losses	10,283			1,229			1,016
Other income	10,762			8,928			15,150
Operating expenses	64,484			62,930			58,997
Net income	20,532			27,882			38,804
Net income attributable to OceanFirst Financial Corp.	20,667			27,797			38,611
Net income available to common stockholders	19,663			26,793			37,607
Diluted earnings per share	0.33			0.45			0.64
SELECTED FINANCIAL RATIOS:
Book value per common share at end of period	27.56			27.37			26.04
Cash dividend per share	0.20			0.20			0.20
Dividend payout ratio per common share	60.61		%	44.44		%	31.25		%
Stockholders’ equity to total assets	12.13			12.01			12.14
Return on average assets (2) (3) (4)	0.57			0.80			1.19
Return on average stockholders’ equity (2) (3) (4)	4.75			6.61			9.68
Net interest rate spread (5)	2.37			2.52			3.19
Net interest margin (2) (6)	2.91			3.02			3.36
Operating expenses to average assets (2) (4)	1.88			1.87			1.87
Efficiency ratio (4) (7)	63.37			62.28			53.10
Loan-to-deposit ratio (8)	96.10			99.30			97.60
ASSET QUALITY (9):
Non-performing loans (10)	$	30,098		$	22,758		$	21,498

Allowance for loan credit losses as a percent of total loans receivable (8) (11)	0.63		%	0.61		%	0.55		%
Allowance for loan credit losses as a percent of total non-performing loans (10) (11)	212.23			271.51			248.96
Non-performing loans as a percent of total loans receivable (8) (10)	0.30			0.23			0.22
Non-performing assets as a percent of total assets (10)	0.22			0.17			0.17

(1) With the exception of end of quarter ratios, all ratios are based on average daily balances.

(2) Ratios are annualized.

(3) Ratios for each period are based on net income available to common stockholders.

(4) Performance ratios for the three months ended September 30, 2023 included a net gain on equity investments of $1.5 million, or $1.1 million, net of tax expense. Performance ratios for the three months ended June 30, 2023 included a net loss on equity investments of $559,000, or $397,000, net of tax benefit. Performance ratios for the three months ended September 30, 2022 included a net benefit related to merger related expenses, net branch consolidation (benefit) expense, and gain on equity investments of $3.4 million, or $2.6 million, net of tax expense.

(5) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(6) Net interest margin represents net interest income as a percentage of average interest-earning assets.

(7) Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income.

(8) Total loans receivable excludes loans held-for-sale.

(9) At September 30, 2023, non-performing loans included the remaining exposure of $8.8 million on a single commercial real estate relationship that was partially charged-off of $8.4 million during the three months ended September 30, 2023.

(10) Non-performing loans and assets generally consist of all loans 90 days or more past due and other loans in the process of foreclosure. It is the Company’s policy to cease accruing interest on all such loans and to reverse previously accrued interest.

(11) Loans acquired from prior bank acquisitions were recorded at fair value. The net unamortized credit and purchased with credit deterioration (“PCD”) marks on these loans, not reflected in the allowance for loan credit losses, was $8.8 million, $9.8 million, and $13.6 million at September 30, 2023, June 30, 2023 and September 30, 2022, respectively.

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Summary

OceanFirst Financial Corp. is the holding company for OceanFirst Bank N.A. (the “Bank”), a regional bank serving business and retail customers throughout New Jersey and the major metropolitan areas of Philadelphia, New York, Baltimore, and Boston. The term “Company” refers to OceanFirst Financial Corp., the Bank and all of their subsidiaries on a consolidated basis. The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investments, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income such as income from bankcard services, trust and asset management products and services, deposit account services, bank owned life insurance, commercial loan swap income, gain on sale of loans, securities and equity investments, title-related fees and service charges and other fees. The Company’s operating expenses primarily consist of compensation and employee benefits, occupancy and equipment, marketing, federal deposit insurance and regulatory assessments, data processing, check card processing, professional fees and other general and administrative expenses. The Company’s results of operations are also significantly affected by competition, general economic conditions, including levels of unemployment and real estate values, as well as changes in market interest rates, inflation, government policies and actions of regulatory agencies.

Key developments relating to the Company’s financial results and corporate activities for the three months ended September 30, 2023 were as follows:

•Deposit Growth: Total deposits increased $375.6 million, or 4%, as compared to the prior linked quarter. The current quarter includes a reduction in brokered time deposits of $425.7 million and a loan-to-deposit ratio of 96.10% at September 30, 2023. The Company’s non-interest-bearing deposits declined modestly and represented 17% of the total deposits.

•Asset Quality: Asset quality metrics remain strong, despite the impact of a charge-off related to a single credit relationship. Criticized and classified loans, and non-performing loans both as a percent of total loans, were 1.30% and 0.20%, respectively, at September 30, 2023.

•Strong Capital: The Company’s common equity tier 1 capital ratio remained above “well-capitalized” levels, at 10.36% at September 30, 2023.

The current quarter results were impacted by the following matters. Net interest income and margin were adversely impacted by a continued mix-shift and repricing to higher cost deposits that outpaced the repricing and increase in yields on interest-earning assets. Deposit betas, which is the change in rates paid to customers relative to the change in federal funds target rate, increased modestly to 35%, from 29%. Additionally, the current quarter results were impacted by an increase in non-performing loans due to a single commercial real estate credit relationship totaling $17 million, which was written down to an estimated realizable value of $8.8 million. The credit was originated in June 2019 and is secured by an office building in Midtown Manhattan, New York City. The credit was also included in total delinquent loans 30 to 89 days at September 30, 2023. Lastly, the Company recognized one-time compensation and benefits expenses of $2.4 million attributable to severance and other program costs relating to performance improvement initiatives.

On October 19, 2023, the Company’s Board of Directors declared a quarterly cash dividend on common stock of $0.20 per share. The dividend, related to the quarter ended September 30, 2023, will be paid on November 17, 2023 to common stockholders of record on November 6, 2023. The Board also declared a quarterly cash dividend on preferred stock of $0.4375 per depositary share, representing a 1/40th interest in the Series A Preferred Stock. This dividend will be paid on November 15, 2023 to preferred stockholders of record on October 31, 2023.

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Recent Developments

The banking industry continued to experience volatility through the third quarter of 2023, which began earlier in the year with several bank failures coupled with related industry-wide concerns including liquidity, funding, and unrealized losses on securities brought on by a rapid increasing rate environment. These developments, among other industry concerns, have created volatility in stock prices across the banking industry, including the Company's own stock price. Despite these industry-concerns, the Company has continued to maintain and strengthen its liquidity and capital position, and serve its customers and communities.

The Company will continue to monitor these industry-wide matters and the impact they may have in future periods, and will respond accordingly as economic and industry conditions change. Refer to the “Liquidity and Capital Resources” section for further information regarding liquidity.

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Analysis of Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. For the three and nine months ended September 30, 2023, interest income included net loan fees of $621,000 and $2.6 million, respectively, as compared to $832,000 and $5.0 million for the same prior year periods, respectively.

The following tables set forth certain information relating to the Company for the three and nine months ended September 30, 2023 and 2022. The yields and costs, which are annualized, are derived by dividing the income or expense by the average balance of the related assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average daily balances. The yields and costs include certain fees and costs which are considered adjustments to yields.


	For the Three Months Ended September 30,
	2023						2022
(dollars in thousands)	Average Balance		Interest		Average Yield/ Cost (1)		Average Balance		Interest		Average Yield/ Cost (1)

Assets:
Interest-earning assets:
Interest-earning deposits and short-term investments	$	470,825	$	6,440	5.43	%	$	65,648	$	336	2.03	%
Securities (2)	1,873,450		18,039		3.82		1,748,687		10,022		2.27
Loans receivable, net (3)
Commercial	6,923,743		103,069		5.91		6,509,515		74,309		4.53
Residential real estate	2,918,612		26,765		3.67		2,791,067		22,818		3.27
Home equity loans and lines and other consumer (“other consumer”)	252,126		4,097		6.45		256,638		3,014		4.66

Allowance for loan credit losses, net of deferred loan costs and fees	(53,959)		—		—		(44,773)		—		—
Loans receivable, net	10,040,522		133,931		5.30		9,512,447		100,141		4.18
Total interest-earning assets	12,384,797		158,410		5.08		11,326,782		110,499		3.88
Non-interest-earning assets	1,252,416						1,191,173
Total assets	$	13,637,213					$	12,517,955
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing checking	$	3,692,500	14,938		1.61	%	$	3,873,968	2,671		0.27	%
Money market	832,729		5,698		2.71		793,230		721		0.36
Savings	1,391,811		3,311		0.94		1,603,147		187		0.05
Time deposits	2,867,921		29,340		4.06		1,467,297		5,659		1.53
Total	8,784,961		53,287		2.41		7,737,642		9,238		0.47
Federal Home Loan Bank (“FHLB”) advances	701,343		8,707		4.93		352,392		2,208		2.49
Securities sold under agreements to repurchase	76,620		261		1.35		96,147		35		0.14
Other borrowings (4)	317,210		5,159		6.45		194,755		3,053		6.22
Total borrowings	1,095,173		14,127		5.12		643,294		5,296		3.27
Total interest-bearing liabilities	9,880,134		67,414		2.71		8,380,936		14,534		0.69
Non-interest-bearing deposits	1,841,198						2,328,700
Non-interest-bearing liabilities (4)	272,982						266,564
Total liabilities	11,994,314						10,976,200
Stockholders’ equity	1,642,899						1,541,755
Total liabilities and equity	$	13,637,213					$	12,517,955
Net interest income			$	90,996					$	95,965
Net interest rate spread (5)					2.37	%					3.19	%
Net interest margin (6)					2.91	%					3.36	%
Total cost of deposits (including non-interest-bearing deposits)					1.99	%					0.36	%

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	For the Nine Months Ended September 30,
	2023						2022
(dollars in thousands)	Average Balance		Interest		Average Yield/ Cost (1)		Average Balance		Interest		Average Yield/ Cost (1)
Assets:
Interest-earning assets:
Interest-earning deposits and short-term investments	$	304,184	$	11,661	5.13	%	$	73,886	$	472	0.85	%
Securities (2)	1,919,660		51,124		3.56		1,801,978		27,086		2.01
Loans receivable, net (3)
Commercial	6,892,456		295,199		5.73		6,275,836		198,054		4.22
Residential real estate	2,895,601		77,862		3.59		2,685,080		66,899		3.32
Other consumer	257,063		11,694		6.08		254,891		8,387		4.40

Allowance for loan credit losses, net of deferred loan costs and fees	(52,626)		—		—		(42,987)		—		—
Loans receivable, net	9,992,494		384,755		5.15		9,172,820		273,340		3.98
Total interest-earning assets	12,216,338		447,540		4.90		11,048,684		300,898		3.64
Non-interest-earning assets	1,234,942						1,191,358
Total assets	$	13,451,280					$	12,240,042
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing checking	$	3,757,417	33,171		1.18	%	$	4,088,759	6,433		0.21	%
Money market	744,689		11,136		2.00		773,666		1,317		0.23
Savings	1,336,497		4,034		0.40		1,617,354		473		0.04
Time deposits	2,388,299		64,210		3.59		1,060,027		9,373		1.18
Total	8,226,902		112,551		1.83		7,539,806		17,596		0.31
FHLB Advances	1,055,106		38,530		4.88		308,043		3,890		1.69
Securities sold under agreements to repurchase	73,441		544		0.99		105,821		117		0.15
Other borrowings (4)	302,649		14,008		6.19		205,796		8,306		5.40
Total borrowings	1,431,196		53,082		4.96		619,660		12,313		2.66
Total interest-bearing liabilities	9,658,098		165,633		2.29		8,159,466		29,909		0.49
Non-interest-bearing deposits	1,913,624						2,352,606
Non-interest-bearing liabilities (4)	253,014						193,147
Total liabilities	11,824,736						10,705,219
Stockholders’ equity	1,626,544						1,534,823
Total liabilities and equity	$	13,451,280					$	12,240,042
Net interest income			$	281,907					$	270,989
Net interest rate spread (5)					2.61	%					3.15	%
Net interest margin (6)					3.09	%					3.28	%
Total cost of deposits (including non-interest-bearing deposits)					1.48	%					0.24	%

(1)Average yields and costs are annualized.

(2)Amounts represent debt and equity securities, including FHLB and Federal Reserve Bank (“FRB”) stock, and are recorded at average amortized cost net of allowance for securities credit losses.

(3)Amount is net of deferred loan costs and fees, undisbursed loan funds, discounts and premiums and allowance for loan credit losses, and includes loans held for sale and non-performing loans.

(4)For the 2023 period, the average balances of derivative cash collateral have been reclassified from non-interest bearing liabilities to other borrowings.

(5)Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.

(6)Net interest margin represents net interest income divided by average interest-earning assets.

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Comparison of Financial Condition at September 30, 2023 and December 31, 2022

Total assets increased by $394.3 million to $13.50 billion, from $13.10 billion, primarily due to higher cash balances and loan growth. Cash and due from banks increased $240.9 million to $408.9 million, from $167.9 million as the Company maintained elevated levels of on-balance sheet cash from net deposit inflows. Total loans increased by $205.5 million to $10.12 billion, from $9.92 billion, due to loan originations.

Total liabilities increased by $342.1 million to $11.86 billion, from $11.52 billion. Deposits increased by $858.7 million to $10.53 billion, from $9.68 billion. Time deposits increased to $2.65 billion, from $1.54 billion, or 25.2% and 15.9% of total deposits, respectively. Brokered time deposits increased $122.1 million and retail time deposits increased $988.0 million. The loan-to-deposit ratio was 96.10%, as compared to 102.50%. FHLB advances decreased by $605.1 million to $606.1 million, from $1.21 billion due to a change in funding mix.

Other liabilities increased by $65.6 million to $411.7 million, from $346.2 million, primarily due to an increase in the market values associated with customer interest rate swaps and related collateral received from counterparties.

Total stockholders’ equity increased to $1.64 billion, as compared to $1.59 billion, primarily reflecting net income net of dividends for the nine months ended September 30, 2023. Additionally, accumulated other comprehensive loss decreased by $7.2 million primarily due to increases in fair market value of available-for-sale debt securities, net of tax.

For the nine months ended September 30, 2023, the Company did not repurchase shares under its stock repurchase program. There were 2,934,438 shares available for repurchase at September 30, 2023 under the existing repurchase program. Book value per share increased to $27.56, as compared to $26.81.

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2023 and September 30, 2022

General

Net income available to common stockholders for the three and nine months ended September 30, 2023 decreased to $19.7 million and $73.3 million, respectively, or $0.33 and $1.24 per diluted share, as compared to $37.6 million and $90.3 million, or $0.64 and $1.53 per diluted share, for the corresponding prior year periods. Net income for the three and nine months ended September 30, 2023 included net gain on equity investments of $1.5 million and net loss on equity investments of $1.3 million, respectively. Net income for the nine months ended September 30, 2023 also included merger related expenses of $22,000, net branch consolidation expense of $70,000 and net loss on sale of investments of $5.3 million. These items increased net income by $1.1 million and decreased net income by $5.1 million, net of tax, for the three and nine months ended September 30, 2023, respectively.

Net income for the three and nine months ended September 30, 2022 included merger related expenses of $298,000 and $2.5 million, respectively, net branch consolidation benefit of $346,000 and net branch consolidation expense of $602,000, and net gain on equity investments of $3.4 million and net loss on equity investments of $7.5 million. These items increased net income by $2.6 million and decreased net income by $8.1 million, net of tax, for the three and nine months ended September 30, 2022, respectively.

Interest Income

Interest income for the three and nine months ended September 30, 2023 increased to $158.4 million and $447.5 million, respectively, from $110.5 million and $300.9 million for the corresponding prior year periods. For the three and nine months ended September 30, 2023, the yield on average interest-earning assets increased to 5.08% and 4.90%, respectively, from 3.88% and 3.64% for the corresponding prior year periods, due to the impact of rising rates on interest-earning assets. Average interest-earning assets increased by $1.06 billion and $1.17 billion for the three and nine months ended September 30, 2023, respectively, primarily driven by commercial loan growth and increases in deposits and short-term investments.

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Interest Expense

Interest expense for the three and nine months ended September 30, 2023 increased to $67.4 million and $165.6 million, respectively, from $14.5 million and $29.9 million in the corresponding prior year periods, reflecting rising rates on costs, deposit mix shift to higher cost time deposits, and increased FHLB advances, and repricing of government deposits. For the three and nine months ended September 30, 2023, the cost of average interest-bearing liabilities increased to 2.71% and 2.29%, respectively, from 0.69% and 0.49% for the corresponding prior year periods, due to mix shift to higher cost of deposits and higher costs of FHLB advances. The total cost of deposits (including non-interest-bearing deposits) increased to 1.99% and 1.48% for the three and nine months ended September 30, 2023, respectively, from 0.36% and 0.24% for the same prior year periods.

Net Interest Income and Margin

Net interest income for the three and nine months ended September 30, 2023 decreased to $91.0 million and increased to $281.9 million, respectively, from $96.0 million and $271.0 million in the corresponding prior year periods, primarily reflecting the net impact of the higher interest rate environment. Net interest margin for the three and nine months ended September 30, 2023 decreased to 2.91% and 3.09%, respectively, from 3.36% and 3.28% for the same prior year periods. Net interest margin decreased primarily due to the increase in cost of funds outpacing the increase in yield on average interest earnings assets in the current interest rate environment and elevated levels of on-balance sheet cash.

Provision for Credit Losses

Provision for credit losses for the three and nine months ended September 30, 2023 was $10.3 million and $14.5 million, respectively, as compared to $1.0 million and $4.1 million for the corresponding prior year periods. The current quarter provision included the net impact of the $8.4 million charge-off noted above and, to a lesser extent, elevated risks and uncertainty in macro-economic conditions in a downside forecast scenario. Net loan charge-offs were $8.3 million for both the three and nine months ended September 30, 2023, respectively, as compared to net loan recoveries of $252,000 and $335,000 for the three and nine months ended September 30, 2022, respectively.

Non-interest Income

Three months ended September 30, 2023 vs. September 30, 2022

Other income decreased to $10.8 million, as compared to $15.2 million. Other income was favorably impacted by net gains on equity investments of $1.5 million and $3.4 million, for the respective quarters. The remaining decrease of $2.5 million was driven by decreases in commercial loan swap income of $1.5 million and fees and service charges of $1.1 million, which were adversely impacted by the current interest rate environment resulting in lower swap volume and mortgage activity.

Nine months ended September 30, 2023 vs. September 30, 2022

Other income decreased to $21.8 million, as compared to $31.5 million. Other income was adversely impacted by net losses on equity investments of $6.6 million, which included $5.3 million of losses related to the sale of investments in the first quarter of 2023, and $7.5 million, for the respective periods. The remaining decrease of $10.7 million was driven by decreases in commercial loan swap income on lower volume of $5.8 million, fees and service charges of $1.1 million on lower title activity, and income from bank owned life insurance of $1.0 million on non-recurring death benefits recognized in the prior year. Additionally, bankcard services revenue decreased $3.4 million, due to the Durbin Amendment which became effective for the Company on July 1, 2022.

Non-interest Expense

Three months ended September 30, 2023 vs. September 30, 2022

Operating expenses increased to $64.5 million, as compared to $59.0 million. The increase of $5.4 million was due to increases in professional fees of $2.8 million and $2.4 million in compensation and employee benefits expenses related to the Company’s ongoing investments to improve profitability and operational efficiencies, and one-time related severance and other program costs. The increase in compensation and benefits expense were partly offset by decreased employee medical benefit claims. The current quarter also included increases to federal deposit insurance and regulatory assessments of $800,000 primarily due to new assessment rates that went into effect on January 1, 2023.

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Nine months ended September 30, 2023 vs. September 30, 2022

Operating expenses increased to $188.7 million, as compared to $175.2 million. Operating expenses were adversely impacted by $92,000 and $3.1 million, for the respective periods, related to merger related expenses and net branch consolidation expense. The remaining increase of $16.5 million was due to increases in professional fees of $7.1 million and federal deposit insurance and regulatory assessments of $1.3 million that were driven by the same factors for the three months ended. The increase in compensation and benefits expense of $5.7 million was due to the $2.4 million increase noted above and merit-related increases.

Income Tax Expense

The provision for income taxes was $6.5 million and $24.1 million for the three and nine months ended September 30, 2023, respectively, as compared to $12.3 million and $29.2 million for the same prior year periods. The effective tax rate was 23.9% and 24.0% for the three and nine months ended September 30, 2023, respectively, as compared to 24.1% and 23.7% for the same prior year periods.

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Liquidity and Capital Resources

Liquidity Management

The Company manages its liquidity and funding needs through its Treasury function and the Asset Liability Committee. The Company has an internal policy that addresses liquidity and management monitors the adherence to policy limits to satisfy current and future cash flow needs. The policy includes internal limits, monitoring of key indicators, deposit concentrations, liquidity sources and availability, quarterly stress testing, collateral management, and other qualitative and quantitative metrics.

Management monitors cash on a daily basis to determine the liquidity needs of the Bank and OceanFirst Financial Corp. (the “Parent Company”), a separate legal entity from the Bank. Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis. As of September 30, 2023, the Bank and Parent Company continued to maintain adequate liquidity under all stress scenarios. The Company also has a detailed contingency funding plan and obtains comprehensive reporting of funding trends on a monthly and quarterly basis, which are reviewed by management.

The Company continually evaluates its on-balance sheet liquidity, including cash and unpledged securities; and funding capacity at the FHLB and FRB Discount Window, and periodically tests each of its lines of credit. As of September 30, 2023, total on-balance sheet liquidity and funding capacity was $4.3 billion.

The Company has a highly operational and granular deposit base, with long-standing client relationships across multiple customer segments providing stable funding. The vast majority of the government deposits are protected by the Federal Deposit Insurance Corporation insurance as well as the State of New Jersey under the Government Unit Deposit Protection Act, which requires uninsured government deposits to be further collateralized by the Bank. At September 30, 2023, the Bank reported in its Call Report $5.27 billion of estimated uninsured deposits. This total included $2.16 billion of collateralized government deposits and $1.46 billion of intercompany deposits of fully consolidated subsidiaries, leaving estimated adjusted uninsured deposits of $1.65 billion, or 16% of total deposits. On balance-sheet liquidity and funding capacity represented 262% of the estimated adjusted uninsured deposits.

The primary sources of liquidity specifically available to the Parent Company are dividends from the Bank, proceeds from the sale of investments, and the issuance of debt, preferred and common stock. For the nine months ended September 30, 2023, the Parent Company received dividend payments of $73.5 million from the Bank. At September 30, 2023, the Parent Company held $70.2 million in cash and cash equivalents.

The Bank’s primary sources of funds are deposits, principal and interest payments on loans and investments, FHLB advances, other borrowings, and proceeds from the sale of loans and investments. While scheduled payments on loans and securities are predictable sources of funds, deposit flows, loan prepayments, and loan and investment sales are greatly influenced by interest rates, economic conditions, and competition. The Bank has other sources of liquidity if a need for additional funds arises, including various lines of credit at multiple financial institutions, access to the FRB discount window, and the Bank Term Funding Program (“BTFP”).

As of September 30, 2023, the Company pledged $7.25 billion of loans with the FHLB and FRB to enhance the Company’s borrowing capacity, and includes collateral pledged to the FHLB to obtain a municipal letter of credit to collateralize certain municipal deposits. The Company also pledged $1.09 billion of securities with FHLB and FRB to secure borrowings, enhance borrowing capacity, collateralize its repurchase agreements, and for other purposes required by law. The Company had $606.1 million of term advances from the FHLB as of September 30, 2023, as compared to $1.21 billion at December 31, 2022, reflecting a shift in funding mix to deposits. As of September 30, 2023, the Company had no overnight borrowings from the FHLB and no outstanding borrowings from the FRB discount window or the BTFP.

The Company’s cash needs for the nine months ended September 30, 2023 were primarily satisfied by the increase in deposits. The cash was primarily kept on the balance sheet to maintain liquidity on hand, and utilized for loan originations and the reduction of FHLB advances.

Off-Balance Sheet Commitments and Contractual Obligations

In the normal course of business, the Bank routinely enters into various off-balance sheet commitments, primarily relating to the origination and funding of loans. At September 30, 2023, outstanding commitments to originate loans totaled $131.2 million and outstanding undrawn lines of credit totaled $1.56 billion, of which $1.21 billion were commitments to commercial and commercial construction borrowers and $349.3 million were commitments to consumer borrowers and residential construction borrowers. Commitments to fund undrawn lines of credit and commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the existing contracts. Commitments generally have

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fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company’s exposure to credit risk is represented by the contractual amount of the instruments.

At September 30, 2023, the Company also had various contractual obligations, which included debt obligations of $885.2 million, including finance lease obligations of $1.7 million, and an additional $20.6 million in operating lease obligations included in other liabilities. The Company expects to have sufficient funds available to meet current commitments in the normal course of business. Time deposits scheduled to mature in one year or less totaled $2.47 billion at September 30, 2023.

Liquidity Used in Stock Repurchases and Cash Dividends

Under the Company’s stock repurchase program, shares of OceanFirst Financial Corp. common stock may be purchased in the open market or through other privately-negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held as treasury stock for general corporate purposes. For the three and nine months ended September 30, 2023, the Company did not repurchase any shares of its common stock. At September 30, 2023, there were 2,934,438 shares available to be repurchased under the authorized stock repurchase program.

Cash dividends on common stock declared and paid during the first nine months of September 30, 2023 was $35.4 million. Cash dividends on preferred stock declared and paid during the first nine months of September 30, 2023 was $3.0 million.

The Company’s ability to continue to pay dividends remains dependent upon capital distributions from the Bank, which may be adversely affected by capital restraints imposed by applicable regulations. The Company cannot predict whether the Bank will be permitted under applicable regulations to pay a dividend to the Parent Company. If applicable regulations or regulatory bodies prevent the Bank from paying a dividend to the Parent Company, the Company may not have the liquidity necessary to pay a dividend in the future or pay a dividend at the same rate as historically paid or be able to meet current debt obligations. Additionally, regulations of the Federal Reserve may prevent the Company from either paying or increasing the cash dividend to common stockholders.

Capital Management

The Company manages its capital sources, uses, and expected future needs through its Treasury function and the Asset Liability Committee. The Company has an internal policy that addresses capital and management monitors the adherence to policy limits to satisfy current and future capital needs. The policy includes internal limits, monitoring of key indicators, sources and availability, intercompany transactions, forecasts and stress testing, and other qualitative and quantitative metrics.

Additionally, management performs multiple capital stress test scenarios on a quarterly basis, varying loan growth, earnings, access to the capital markets, credit losses, and more recently, mark-to-market losses in the investment portfolio, including both available-for-sale and held-to-maturity. As of September 30, 2023, the Bank and Parent Company continued to maintain adequate capital under all stress scenarios, including a scenario where all losses related to the investment securities portfolio are realized. The Bank and the Parent Company also have detailed contingency capital plans and obtain comprehensive reporting of capital trends on a regular basis, which are reviewed by management and the Board.

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Regulatory Capital Requirements

As of September 30, 2023 and December 31, 2022, the Company and the Bank satisfied all regulatory capital requirements currently applicable as follows (dollars in thousands):


	Actual				For capital adequacy purposes					To be well-capitalized under prompt corrective action
As of September 30, 2023	Amount		Ratio		Amount		Ratio			Amount		Ratio
Company:
Tier 1 capital (to average assets)	$	1,200,832	9.14	%	$	525,331	4.00	%		N/A		N/A
Common equity Tier 1 (to risk-weighted assets)	1,071,480		10.36		723,689		7.00		(1)	N/A		N/A
Tier 1 capital (to risk-weighted assets)	1,200,832		11.62		878,766		8.50		(1)	N/A		N/A
Total capital (to risk-weighted assets)	1,392,971		13.47		1,085,534		10.50		(1)	N/A		N/A
Bank:
Tier 1 capital (to average assets)	$	1,147,262	8.80	%	$	521,320	4.00	%		$	651,650	5.00	%
Common equity Tier 1 (to risk-weighted assets)	1,147,262		11.21		716,158		7.00		(1)	665,004		6.50
Tier 1 capital (to risk-weighted assets)	1,147,262		11.21		869,620		8.50		(1)	818,466		8.00
Total capital (to risk-weighted assets)	1,214,139		11.87		1,074,237		10.50		(1)	1,023,083		10.00
As of December 31, 2022
Company:
Tier 1 capital (to average assets)	$	1,150,690	9.43	%	$	488,297	4.00	%		N/A		N/A
Common equity Tier 1 (to risk-weighted assets)	1,021,774		9.93		720,641		7.00		(1)	N/A		N/A
Tier 1 capital (to risk-weighted assets)	1,150,690		11.18		875,064		8.50		(1)	N/A		N/A
Total capital (to risk-weighted assets)	1,336,652		12.98		1,080,961		10.50		(1)	N/A		N/A
Bank:
Tier 1 capital (to average assets)	$	1,122,946	9.20	%	$	488,033	4.00	%		$	610,041	5.00	%
Common equity Tier 1 (to risk-weighted assets)	1,122,946		11.02		713,194		7.00		(1)	662,251		6.50
Tier 1 capital (to risk-weighted assets)	1,122,946		11.02		866,021		8.50		(1)	815,078		8.00
Total capital (to risk-weighted assets)	1,183,705		11.62		1,069,791		10.50		(1)	1,018,848		10.00

(1)Includes the Capital Conservation Buffer of 2.50%.

The Company and the Bank satisfied the criteria to be “well-capitalized” under the Prompt Corrective Action regulations.

At September 30, 2023 and December 31, 2022, the Company maintained a stockholders’ equity to total assets ratio of 12.13% and 12.10%, respectively.

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Non-Performing Assets

The following table sets forth information regarding the Company’s non-performing assets, consisting of non-performing loans. It is the policy of the Company to cease accruing interest on loans 90 days or more past due or in the process of foreclosure.


	September 30,			December 31,
	2023			2022
	(dollars in thousands)
Non-performing loans:
Commercial real estate – investor	$	20,723		$	10,483
Commercial real estate – owner occupied	240			4,025
Commercial and industrial	1,120			331
Residential real estate	5,624			5,969
Other consumer	2,391			2,457




Total non-performing loans and assets	$	30,098		$	23,265
PCD loans, net of allowance for loan credit losses	$	18,640		$	27,129
Delinquent loans 30-89 days	$	20,591		$	14,148
Allowance for loan credit losses as a percent of total loans	0.63		%	0.57		%
Allowance for loan credit losses as a percent of total non-performing loans	212.23			244.25
Non-performing loans as a percent of total loans receivable	0.30			0.23
Non-performing assets as a percent of total assets	0.22			0.18

The Company’s non-performing loans totaled $30.1 million at September 30, 2023, as compared to $23.3 million at December 31, 2022. At September 30, 2023, non-performing loans included the remaining exposure of $8.8 million on a single commercial real estate relationship that was partially charged-off during the three months ended September 30, 2023. At September 30, 2023, total non-performing loans included $869,000 of modified loans to borrowers experiencing financial difficulty and $5.8 million of troubled debt restructuring (“TDR”) loans that existed prior to adoption of Accounting Standards Update (“ASU”) 2022-02 on January 1, 2023. At December 31, 2022, total non-performing loans included $6.4 million of TDR loans. Included in the non-performing loans total was $3.2 million and $3.9 million of PCD loans at September 30, 2023 and December 31, 2022, respectively. At September 30, 2023, the allowance for loan credit losses totaled $63.9 million, or 0.63% of total loans, as compared to $56.8 million, or 0.57% of total loans, at December 31, 2022. These ratios exclude existing net unamortized credit and PCD marks on acquired loans of $8.8 million and $11.4 million at September 30, 2023 and December 31, 2022, respectively.

The Company classifies loans and other assets in accordance with regulatory guidelines. The table below excludes any loans held-for-sale and represents Special Mention and Substandard assets (in thousands):


	September 30,		December 31,
	2023		2022
Special Mention	$	44,940	$	48,214
Substandard	86,597		50,776

The change in substandard loans was primarily due to a migration of certain loans from special mention to substandard risk rating, which partly consisted of two CRE-Investor Owned relationships totaling $16.1 million. The remaining increase in substandard loans was primarily due to three commercial relationships for $13.7 million, which were downgraded to substandard during the nine months ended September 30, 2023. Additionally, the change in special mention loans was primarily due to two commercial relationships totaling $22.9 million that were downgraded during the nine months ended September 30, 2023, partly offset by the commercial real estate relationship that was charged-off for $8.4 million for the three months ended September 30, 2023.

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Critical Accounting Policies and Estimates

Note 1 to the Company’s Audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”), as supplemented by this report, contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at estimated fair value or the lower of cost or estimated fair value. Policies with respect to the methodology used to determine the allowance for credit losses is a critical accounting policy and estimate because of its importance to the presentation of the Company’s financial condition and results of operations. The critical accounting policy involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could result in material differences in the results of operations or financial condition. The critical accounting policy and its application is reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors.

Goodwill

Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets acquired through purchase acquisitions. Goodwill is evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances indicate potential impairment between annual measurement dates (i.e. triggering events). For the purposes of goodwill impairment testing, management has concluded that the Company has one reporting unit and the annual impairment test is performed as of August 31.

Testing of goodwill impairment comprises a two-step process. First, the Company performs a qualitative assessment to evaluate relevant events or circumstances to determine whether it is more likely than not that the fair value of the Company is less than its carrying amount, including goodwill. The factors considered in the qualitative assessment include macroeconomic conditions, industry and market conditions and overall financial performance of the Company, among other factors. If the Company determines that it is more likely than not that the fair value of the Company is less than its carrying amounts, then it proceeds to the quantitative impairment test, whereby it calculates the fair value of the Company. In its performance of impairment testing, management has the unconditional option to proceed directly to the quantitative impairment test, bypassing the qualitative assessment. If the carrying amount of the Company exceeds its fair value, the amount by which the carrying amount exceeds fair value, up to the carrying value of goodwill, is recorded through earnings as an impairment charge. If the results of the qualitative assessment indicate that it is not more likely than not that an impairment has occurred, or if the quantitative impairment test results in a fair value of the Company that is greater than the carrying amount, then no impairment charge is recorded.

As of the annual impairment testing date of August 31, 2023, the Company bypassed the qualitative assessment and proceeded directly to the quantitative impairment test based on the stock price on the measurement date and economic uncertainty and market volatility impacting the banking sector. To perform the quantitative assessment, the Company engaged a third-party service provider to assist management with the determination of the fair value of the Company. A combination of an income valuation methodology, comprising a discounted cash flow analysis, and a market valuation methodology, comprising the guideline public company method, was employed. Management then assigned weightings to the two approaches to conclude on the estimated fair value. The weightings took into consideration recent market volatility and suppressed stock price of the Company and the banking industry.

The discounted cash flow (“DCF”) estimated the present value of future cash flows. A DCF analysis requires significant judgment to model financial forecasts, which included loan and deposit growth, funding mix, income on securities, credit performance, forward interest rates, future returns driven by net interest margin, fee generation and expense incurrence, industry and economic trends, and other relevant considerations. For periods beyond those forecasted, a terminal value was estimated based on an assumed long-term growth rate, which was derived using the Gordon Growth Model. The discount rate applied to the forecasted cash flows was calculated using a build-up approach, which starts with the risk-free interest rate and then calibrated for market and company specific risk premiums, including a beta, equity risk, size, and company-specific risk premiums to reflect risks and uncertainties in the financial market and in the Company’s business projections.

The market approach utilizes observable market data from comparable public companies, including price-to-tangible book value ratios, to estimate the Company’s fair value. The market approach also incorporates a control premium to represent the Company’s expectation of a hypothetical acquisition. Management uses judgment in the selection of comparable companies and includes those with similar business activities, and related operating environments.

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The results of the quantitative assessment indicated that the fair value of the Company’s reporting unit exceeded its carrying amount, though not substantially, which resulted in no impairment loss at August 31, 2023.

Management continued to carefully assess and evaluate all available information for potential triggering events after the August 31 annual testing date. Though it observed some deterioration in inputs to the market approach, management believes that the banking sector continues to experience market dislocation and concluded no triggering events were identified subsequent to the annual test date.

Significant negative industry or economic trends, including declines in the market price of the Company’s stock, reduced estimates of future cash flows or business disruptions could result in impairments to goodwill in the future, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations. Management will continue evaluating the economic conditions at future reporting periods for triggering events.

Impact of New Accounting Pronouncements

Accounting Pronouncements Adopted in 2023

In March 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-01 “Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method”, which made targeted improvements to the optional hedge accounting model with the objective of improving hedge accounting to better portray the economic results of an entity’s risk management activities in its financial statements. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2022. Early adoption is permitted for any entity that has adopted the amendments in ASU 2017-12 for the corresponding period. The adoption of this standard did not have an impact on the Company’s consolidated financial statements, as the Company currently does not have any fair value hedges.

In March 2022, FASB issued ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”. The amendments in this ASU were issued to (1) eliminate accounting guidance for TDRs by creditors, while enhancing disclosure requirements for loan refinancings and restructurings when a borrower is experiencing financial difficulty; (2) require disclosures of current period gross write-offs by year of origination for financing receivables and net investments in leases. For entities that have adopted the amendments in ASU 2016-13, Measurement of Credit Losses on Financial Instruments, this update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2022. Early adoption is permitted. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, where there is an option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. The Company adopted this guidance prospectively, and the adoption of this standard did not have an impact on the Company’s consolidated financial statements.

In December 2022, FASB issued ASU 2022-06, “Deferral of the Sunset Date of Topic 848”, which was effective upon issuance. The amendments in this ASU defer the sunset date of Topic 848 (Reference Rate Reform) from December 31, 2022 to December 31, 2024. Topic 848, originally issued in 2020 and later amended in 2021, provides optional accounting expedients and exceptions for certain loan agreements, derivatives and other transactions affected by the transition away from London Inter-Bank Offered Rate (“LIBOR”) towards alternative reference rates. As of December 31, 2021, the Company adopted certain of these practical expedients in Topic 848 and will continue to apply prospectively until December 31, 2024. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Transition from LIBOR

As of December 31, 2021, the Company ceased issuing LIBOR-based products and transitioned to Alternative Rates. For the tenors of U.S. dollar LIBOR utilized by the Company, the administrator of LIBOR extended publication until June 30, 2023. As of June 30, 2023, the Company has transitioned substantially all of its previously existing LIBOR-based products that were not expected to mature or settle prior to the cessation date. Contract language for all remaining LIBOR-based loans, securities, and borrowings has been reviewed and updated as necessary to automatically convert to an Alternative Rate at their next rate reset date with no action required.

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Recent Accounting Pronouncements Not Yet Adopted

In June 2022, FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. The amendments in this ASU clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. In addition, this update introduces new disclosure requirements to provide information about the contractual sales restriction including the nature and remaining duration of the restriction. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2023. Early adoption is permitted. The Company does not expect this standard to have a material impact to the consolidated financial statements.

In March 2023, FASB issued ASU 2023-02, “Investments - Equity Method and Joint Venture (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”. The amendments in this ASU permit reporting entities to account for the tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method. This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluating the impact of this standard on the consolidated financial statements.

In August 2023, FASB issued ASU 2023-05, “Business Combinations - Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement”. The amendments in this ASU require that a joint venture, upon formation, apply a new basis of accounting and initially measure assets and liabilities at fair value, with exceptions to fair value measurement that are consistent with the business combinations guidance. This update will be effective prospectively for all joint venture formations with a formation date on or after January 1, 2025. Early adoption is permitted. The Company does not expect this standard to have a material impact to the consolidated financial statements.

Private Securities Litigation Reform Act Safe Harbor Statement

In addition to historical information, this quarterly report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are based on certain assumptions and describe future plans, strategies and expectations of OceanFirst Financial Corp. (the “Company”). These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “will,” “should,” “may,” “view,” “opportunity,” “potential,” or similar expressions or expressions of confidence. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to: changes in interest rates, inflation, general economic conditions, potential recessionary conditions, levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, including specific loan exposures, such as lending for office space, potential goodwill impairment, future natural disasters, potential increases to flood insurance premiums, the current or anticipated impact of military conflict, terrorism or other geopolitical events, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, changes in liquidity, including the size and composition of the Company’s deposit portfolio, including the percentage of uninsured deposits in the portfolio, competition, demand for financial services in the Company’s market area, changes in consumer spending, borrowing and saving habits, changes in accounting principles, a failure in or breach of the Company’s operational or security systems or infrastructure, including cyberattacks, the failure to maintain current technologies, failure to retain or attract employees, the impact of the COVID-19 pandemic or any other pandemic on our operations and financial results and those of our customers and the Bank’s ability to successfully integrate acquired operations.

These risks and uncertainties are further discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, under Item 1A - Risk Factors and elsewhere, and subsequent securities filings and should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Management of Interest Rate Risk (“IRR”)

Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from the IRR inherent in its lending, investment, deposit-taking, and funding activities. The Company’s profitability is affected by fluctuations in interest rates. Changes in interest rates may negatively or positively impact the Company’s earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. Changes in interest rates may also negatively or positively impact the market value of the Company’s investment securities, in particular fixed-rate instruments. Net gains or losses in available-for-sale securities can increase or decrease accumulated other comprehensive income or loss and total stockholders’ equity. To that end, management actively monitors and manages IRR. The extent of the movement of interest rates, higher or lower, is an uncertainty that could have a substantial impact on the earnings and stockholders’ equity of the Company.

The principal objectives of the IRR management function are to: evaluate the IRR inherent in the Company’s business; determine the level of risk appropriate given the Company’s business focus, operating environment, capital, and liquidity requirements and performance objectives; and manage the risk consistent with Board approved guidelines. The Company’s Board has established an Asset Liability Committee (“ALCO”) consisting of members of management, responsible for reviewing asset liability policies and the IRR position. ALCO meets regularly and reports the Company’s IRR position and trends to the Board on a regular basis.

The Company utilizes a number of strategies to manage IRR including, but not limited to: (1) managing the origination, purchase, sale, and retention of various types of loans with differing IRR profiles; (2) attempting to reduce the overall interest rate sensitivity of liabilities by emphasizing core and longer-term deposits; (3) selectively purchasing interest rate swaps and caps converting the rates for customer loans to manage individual loans and the Bank’s overall IRR profile; (4) managing the investment portfolio IRR profile; (5) managing the maturities and rate structures of borrowings and time deposits; and (6) purchasing interest rate swaps to manage overall balance sheet interest rate risk.

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive.” Interest rate sensitivity is monitored through the use of an IRR model, which measures the change in the institution’s economic value of equity (“EVE”) and net interest income under various interest rate scenarios. EVE is the difference between the net present value of assets, liabilities and off-balance-sheet contracts. The EVE ratio, in any interest rate scenario, is defined as the EVE in that scenario divided by the fair value of assets in the same scenario. Interest rate sensitivity is monitored by management through the use of a model which measures IRR by modeling the change in EVE and net interest income over a range of interest rate scenarios. Modeled assets and liabilities are assumed to reprice at respective repricing or maturity dates. Pricing caps and floors are included in the results, where applicable. The Company uses prepayment expectations set forth by market sources as well as Company generated data where applicable. Generally, cash flows from loans and securities are assumed to be reinvested to maintain a static balance sheet. Other assumptions about balance sheet mix are generally held constant. The Company’s interest rate sensitivity should be reviewed in conjunction with the financial statements and notes thereto contained in the 2022 Form 10-K.

The methodologies and assumptions used in this analysis are periodically evaluated and refined in response to changes in the market environment, changes in the Company’s balance sheet composition, enhancements in the Company’s modeling and other factors. Such changes may affect historical comparisons of these results.

In the third quarter of 2023, the Company refined certain fair value assumptions related to the loan portfolio, including prepayment rates. This resulted in a modest increase to EVE and a decrease to its sensitivity, and had a marginal impact to the net interest income scenarios.

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The Company performs a variety of EVE and twelve-month net interest income sensitivity scenarios. The following table sets forth sensitivity scenarios for a specific range of interest rate scenarios as of September 30, 2023 and December 31, 2022 (dollars in thousands).


	September 30, 2023										December 31, 2022
Change in Interest Rates in Basis Points (Rate Shock)	Economic Value of Equity						Net Interest Income				Economic Value of Equity						Net Interest Income
	Amount		% Change		EVE Ratio		Amount		% Change		Amount		% Change		EVE Ratio		Amount		% Change
(dollars in thousands)

200	$	1,259,131	(5.8)	%	10.7	%	$	366,350	2.3	%	$	1,574,239	(8.5)	%	13.7	%	$	440,916	1.2	%
100	1,292,658		(3.3)		10.8		362,079		1.1		1,646,301		(4.3)		13.9		438,280		0.6
Static	1,337,280		—		10.9		357,985		—		1,719,619		—		14.1		435,492		—
(100)	1,409,846		5.4		11.2		353,749		(1.2)		1,762,678		2.5		14.0		428,519		(1.6)
(200)	1,486,373		11.1		11.4		347,889		(2.8)		1,740,837		1.2		13.5		412,038		(5.4)

The net interest income sensitivity results indicate that at both September 30, 2023 and December 31, 2022 the Company was modestly asset sensitive. The change in sensitivity between these periods was impacted by growth in floating rate loan and an increase in cash on hand, offset by the deposit mix shift into short-term time deposits and higher-yield savings deposits.

Overall, the measure of EVE at risk increased in all rising rate scenarios from December 31, 2022 to September 30, 2023. This increase was the result of rising market rates resulting in lower market values in the loan and investment portfolios, along with the impact of an increase in deposit costs and a shift from lower cost, long-term non-maturity deposits to short-term higher cost time deposits and higher-yield savings deposits.

Certain shortcomings are inherent in the methodology used in the EVE and net interest income IRR measurements. The model requires the making of certain assumptions which may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates. First, the model assumes that the composition of the Company’s interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured. Second, the model assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Third, the model does not take into account the Company’s business or strategic plans or any steps it may take to respond to changes in rates. Fourth, prepayment, rate sensitivity, and average life assumptions can have a significant impact on the IRR model results. Lastly, the model utilizes data derived from historical performance. Accordingly, although the above measurements provide an indication of the Company’s IRR exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates, given the unique nature of the post-pandemic interest rate environment and the speed with which interest rates have been changing, the projections noted above on the Company’s EVE and net interest income and can be expected to significantly differ from actual results.

Item 4. Controls and Procedures

(a) Disclosure Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (“SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in thousands, except per share amounts)


	September 30,		December 31,
	2023		2022
	(Unaudited)
Assets
Cash and due from banks	$	408,882	$	167,946

Debt securities available-for-sale, at estimated fair value	453,208		457,648
Debt securities held-to-maturity, net of allowance for securities credit losses of $932 at September 30, 2023 and $1,128 at December 31, 2022 (estimated fair value of $1,047,342 at September 30, 2023 and $1,110,041 at December 31, 2022)	1,189,339		1,221,138
Equity investments	97,908		102,037
Restricted equity investments, at cost	82,484		109,278
Loans receivable, net of allowance for loan credit losses of $63,877 at September 30, 2023 and $56,824 at December 31, 2022	10,068,156		9,868,718
Loans held-for-sale	—		690
Interest and dividends receivable	50,030		44,704

Premises and equipment, net	122,646		126,705

Bank owned life insurance	265,071		261,603

Assets held for sale	3,004		2,719
Goodwill	506,146		506,146
Core deposit intangible	10,489		13,497
Other assets	240,820		221,067
Total assets	$	13,498,183	$	13,103,896
Liabilities and Stockholders’ Equity
Deposits	$	10,533,929	$	9,675,206
Federal Home Loan Bank (“FHLB”) advances	606,056		1,211,166
Securities sold under agreements to repurchase with customers	82,981		69,097
Other borrowings	196,183		195,403
Advances by borrowers for taxes and insurance	29,696		21,405
Other liabilities	411,734		346,155
Total liabilities	11,860,579		11,518,432
Stockholders’ equity:
Preferred stock, $0.01 par value, $1,000 liquidation preference, 5,000,000 shares authorized, and 57,370 shares issued at both September 30, 2023 and December 31, 2022	1		1
Common stock, $0.01 par value, 150,000,000 shares authorized, 62,156,581 and 61,877,686 shares issued at September 30, 2023 and December 31, 2022, respectively; and 59,421,498 and 59,144,128 shares outstanding at September 30, 2023 and December 31, 2022, respectively	613		612
Additional paid-in capital	1,160,869		1,154,821
Retained earnings	577,708		540,507
Accumulated other comprehensive loss	(28,811)		(35,982)
Less: Unallocated common stock held by Employee Stock Ownership Plan ("ESOP")	(4,383)		(6,191)
Treasury stock, 2,735,083 and 2,733,558 shares at September 30, 2023 and December 31, 2022	(69,106)		(69,106)


OceanFirst Financial Corp. stockholders’ equity	1,636,891		1,584,662
Non-controlling interest	713		802
Total stockholders’ equity	1,637,604		1,585,464
Total liabilities and stockholders’ equity	$	13,498,183	$	13,103,896

See accompanying Notes to Unaudited Consolidated Financial Statements.

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OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
	(Unaudited)				(Unaudited)
Interest income:
Loans	$	133,931	$	100,141	$	384,755	$	273,340
Debt securities	15,223		8,479		43,829		23,456
Equity investments and other	9,256		1,879		18,956		4,102
Total interest income	158,410		110,499		447,540		300,898
Interest expense:
Deposits	53,287		9,238		112,551		17,596
Borrowed funds	14,127		5,296		53,082		12,313
Total interest expense	67,414		14,534		165,633		29,909
Net interest income	90,996		95,965		281,907		270,989
Provision for credit losses	10,283		1,016		14,525		4,121
Net interest income after provision for credit losses	80,713		94,949		267,382		266,868
Other income:
Bankcard services revenue	1,507		1,509		4,381		7,782
Trust and asset management revenue	662		568		1,919		1,835
Fees and service charges	5,178		6,320		15,939		17,026



Net gain on sales of loans	66		168		119		348
Net gain (loss) on equity investments	1,452		3,362		(5,908)		(7,502)
Net gain from other real estate operations	—		—		—		48
Income from bank owned life insurance	1,390		1,356		3,853		4,881
Commercial loan swap income	11		1,471		712		6,546
Other	496		396		748		579
Total other income	10,762		15,150		21,763		31,543
Operating expenses:
Compensation and employee benefits	35,534		34,124		103,676		97,972
Occupancy	5,466		5,288		15,970		15,790
Equipment	1,172		1,150		3,478		3,856
Marketing	1,183		655		3,126		2,242
Federal deposit insurance and regulatory assessments	2,557		1,757		6,771		5,435
Data processing	6,086		6,560		18,405		18,466
Check card processing	1,154		1,231		3,649		3,728
Professional fees	5,258		2,502		15,439		8,296

Amortization of core deposit intangible	987		1,171		3,008		3,559
Branch consolidation (benefit) expense, net	—		(346)		70		602
Merger related expenses	—		298		22		2,459
Other operating expense	5,087		4,607		15,109		12,748
Total operating expenses	64,484		58,997		188,723		175,153
Income before provision for income taxes	26,991		51,102		100,422		123,258
Provision for income taxes	6,459		12,298		24,109		29,212
Net income	20,532		38,804		76,313		94,046
Net (loss) income attributable to non-controlling interest	(135)		193		(34)		715
Net income attributable to OceanFirst Financial Corp.	20,667		38,611		76,347		93,331
Dividends on preferred shares	1,004		1,004		3,012		3,012
Net income available to common stockholders	$	19,663	$	37,607	$	73,335	$	90,319
Basic earnings per share	$	0.33	$	0.64	$	1.24	$	1.54
Diluted earnings per share	$	0.33	$	0.64	$	1.24	$	1.53
Average basic shares outstanding	59,104		58,681		59,037		58,777
Average diluted shares outstanding	59,111		58,801		59,068		58,918

See accompanying Notes to Unaudited Consolidated Financial Statements.

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OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
	(Unaudited)				(Unaudited)
Net income	$	20,532	$	38,804	$	76,313	$	94,046
Other comprehensive income (loss):
Net unrealized gain (loss) on debt securities (net of tax expense of $572 and $2,430 in 2023 and tax benefit of $3,023 and $11,411 in 2022, respectively)	1,797		(9,490)		7,626		(35,858)
Accretion of unrealized loss on debt securities reclassified to held-to-maturity (net of tax expense of $66 and $176 in 2023 and tax expense of $60 and $186 in 2022, respectively)	116		87		277		265
Unrealized loss on derivative hedges (net of tax benefit of $198 and $573 in 2023)	(622)		—		(1,798)		—
Reclassification adjustment for losses (gains) included in net income (net of tax expense of $78 and $340 in 2023 and tax benefit $26 in 2022, respectively)	246		—		1,066		(82)

Total other comprehensive income (loss), net of tax	1,537		(9,403)		7,171		(35,675)
Total comprehensive income	22,069		29,401		83,484		58,371
Less: comprehensive (loss) income attributable to non-controlling interest	(135)		193		(34)		715
Comprehensive income attributable to OceanFirst Financial Corp.	22,204		29,208		83,518		57,656
Less: Dividends on preferred shares	1,004		1,004		3,012		3,012
Total comprehensive income available to common stockholders	$	21,200	$	28,204	$	80,506	$	54,644

See accompanying Notes to Unaudited Consolidated Financial Statements.

OceanFirst Financial Corp.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(dollars in thousands, except per share amounts)

(Unaudited)

For the Three Months Ended September 30, 2023 and 2022


	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive (Loss) Income		Employee Stock Ownership Plan		Treasury Stock		Non-Controlling Interest		Total
Balance at June 30, 2022	$	1	$	612	$	1,151,363	$	474,114	$	(29,093)	$	(7,403)	$	(69,106)	$	944	$	1,521,432
Net income	—		—		—		38,611		—		—		—		193		38,804
Other comprehensive loss, net of tax	—		—		—		—		(9,403)		—		—		—		(9,403)
Stock compensation	—		—		1,619		—		—		—		—		—		1,619




Allocation of ESOP stock	—		—		(5)		—		—		606		—		—		601
Cash dividend $0.20 per share	—		—		—		(11,752)		—		—		—		—		(11,752)
Exercise of stock options	—		—		95		—		—		—		—		—		95





Preferred stock dividend	—		—		—		(1,004)		—		—		—		—		(1,004)

Distributions to non-controlling interest	—		—		—		(2)		—		—		—		(174)		(176)
Balance at September 30, 2022	$	1	$	612	$	1,153,072	$	499,967	$	(38,496)	$	(6,797)	$	(69,106)	$	963	$	1,540,216

Balance at June 30, 2023	$	1	$	613	$	1,159,394	$	569,867	$	(30,348)	$	(4,986)	$	(69,106)	$	848	$	1,626,283
Net income (loss)	—		—		—		20,667		—		—		—		(135)		20,532
Other comprehensive income, net of tax	—		—		—		—		1,537		—		—		—		1,537
Stock compensation	—		—		1,574		—		—		—		—		—		1,574



Allocation of ESOP stock	—		—		(99)		—		—		603		—		—		504
Cash dividend $0.20 per share	—		—		—		(11,822)		—		—		—		—		(11,822)





Preferred stock dividend	—		—		—		(1,004)		—		—		—		—		(1,004)




Balance at September 30, 2023	$	1	$	613	$	1,160,869	$	577,708	$	(28,811)	$	(4,383)	$	(69,106)	$	713	$	1,637,604

OCEANFIRST FINANCIAL CORP [OCFCP] Filings

OCEANFIRST FINANCIAL CORP [OCFC] Filings